Tenant Quality: How a Property Can Become More Valuable Without Increasing in Value
I’m continuing the topic of tenant quality today. I’ve been describing how I was extremely happy to get a new tenant for one of my properties.
I feel this way because the previous tenant was, well, difficult, to put it politely. Oh, he ran the business profitably and always paid rent on time. You would think that made him the perfect tenant. But he wasn’t. He was unpleasant to deal with.
Now, business is business, and you might think that values such as being pleasant don’t count for much. But it can count a lot. See, you can get things done easier, quicker, and cheaper when you have a cooperative tenant. It’s hard to get anything done in an atmosphere of dislike, distrust, or where there’s a willingness to involve lawyers at the first opportunity.
The problems with this tenant started a long time before I came on the scene. By the time I purchased the property, there was an escalating fight in progress between the tenant and the previous owner. In summary:
- the lease said that the tenant had to paint the building. The tenant refused. When the tenant refused, the owner started sending the legal notices. The tenant went to his own lawyer, and soon enough expensive legal letters flew back and forth.
- a few months later, the building still was not painted. The lease said that when the owner incurs legal costs, enforcing the lease, then the tenant must pay them (commercial leases generally favour the landlord like this). So, the tenant got a bill for all the legal costs. The tenant refused to pay these costs. Things were getting nasty, and all over a coat of paint. The legal costs had become much higher than the cost of painting, but that’s how silly people can get when they’re angry.
- towards the end, every time the owners wanted to inspect the building, the tenant refused to let them on the property. Ultimately, the owners had to get police to escort them onto the property, so they could safely inspect the property without interference from the tenant.
- there were other similar issues, about carpets, general maintenance, and so on. Nothing went smoothly. There was no goodwill on either side. Everything ended up in a fight.
Sure, eventually, with enough legal procedures, the tenant would either have to comply with the lease, or be evicted. But the cost for the owners, both financial and in terms of peace-of-mind, was huge. In fact, I’m sure this is why they put the property on the market. By the time we came along, they were very keen to sell. This property was supposed to be an investment which looked after the owners in retirement. But they were not enjoying retirement. They were stressed, and simply tired of the whole thing. They wanted out. So I bought it.
One of the problems with this property is that by the time I purchased it, the tenant was no longer on speaking terms with the property manager. There was a poisonous relationship, which was no good to anyone. So I decided I would manage this property myself. I have some training in customer service, so I felt I would be able to resolve conflict better than the previous owners. Well, my skills were tested to the limit! Sure enough, within a month, the tenant was on the phone, furious over some matter. The matter itself was a fairly minor misunderstanding, which, with most people, would be resolved in about one minute. But not this guy. He was what I would call disproportionately angry. He reminded me of those people you read about who in a road rage attack will kill someone over changing lanes without indicating. With my training, I was able to resolve the problem in a way that satisfied him, and he ended up apologizing for getting so angry. So we kept our working relationship, but things weren’t easy.
Fortunately for me, soon afterwards, that tenant decided to sell the business. Most people assumed that he enjoyed fights, since he would get into them so often, but I guess the fighting must have been causing stress for him as well.
He sold his business to one of his employees. This was a perfect opportunity to make a fresh start. In my book, it was worth flying for two hours each way just to meet them for fifteen minutes. Business is based on relationships, and I think it makes an enormous difference to actually meet the people you’re talking to.
The meeting went well. Just about everything the new tenant said was music to my ears. For example, she told me: “I’m Italian, and was brought up to look after something, whether it belongs to you or not. Now there are some improvements I’d like to make to your property, that I want to talk to you about. I want to repaint this room, install new powerpoints here, …”
What a breath of fresh air! Here is someone who is not looking for a fight. Instead, they want to have a good relationship, based on mutual respect and goodwill.
This doesn’t show up on any balance sheet. If I was getting the property valued, I would expect the value to come in the same, with either tenant. But it’s worth a lot more to me now, because I don’t have to spend my time, money, and energy on fighting.
And guess what? Because she’s so much nicer to deal with, the business is doing a lot better since she took over. Customers are flooding back - almost more than she can handle. She’s making more money, and can more easily pay the rent. Everybody wins.
I’m happy when the world works out this way.